Final answer:
The statement that one must know the discount rate to compute NPV but not IRR is true. NPV requires a specific discount rate while IRR is the rate at which the NPV of future cash flows is zero. Other options in the question have inaccuracies regarding the evaluation of financing projects and their relationship with the discount rate.
Step-by-step explanation:
The student's question is probing the concepts of internal rate of return (IRR), net present value (NPV), and the various methods of project evaluation in financial management.
After careful consideration, the true statement from the given options is that you must know the discount rate to compute the NPV but not the IRR.
This is because NPV calculation requires a specific discount rate to determine the present value of future cash flows, whereas IRR is the discount rate at which the NPV of those cash flows is zero. In other words, IRR is computed by finding the rate where the sum of the present value of future cash flows equals the initial investment.
Financing projects can have multiple IRRs if the cash flow stream changes signs multiple times, and a financing project is not acceptable if its NPV is negative because a negative NPV indicates that the project's return is less than the discount rate used.
The payback method typically does not involve a discount rate, unlike the NPV calculation, and although you do not need a discount rate to calculate IRR, it is required for NPV, profitability index (PI), and discounted payback calculations.
These concepts are especially relevant when analyzing potential capital gains, dividends, and the impact of interest rate changes on the valuation of financial assets such as bonds.